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Teacher Needs to Earn Better Returns

Pat Miller, 58, is six years from retirement and terrified she could run out of money in her old age.

It's not that Miller, who teaches English as a second language for adults in the South Bay, didn't start thinking about retirement before now.

Quite the contrary. She had been saving for years and had a nest egg of a few hundred thousand dollars when she started talking nine years ago with a real estate investment manager who was a member of her church. He said he wanted to help her secure her future. With that kind of personal reference, how, she thought, could she go wrong?

The man headed a small private company that managed real estate partnerships, and he persuaded her to invest in it. The California real estate market was red-hot then, and many people were climbing on the partnerships bandwagon, expecting to profit from rising real estate values and from the income generated from property rentals.

For a while, everything went well. She was getting checks from her investment, and she thought she had chosen something secure.

Everything was going so well, in fact, that over a three-year period ending in 1990, Miller put the bulk of her savings--more than $200,000--into 11 equity limited partnerships. Miller had heard that it's important to diversify one's investments, but the fact that she had so many different stakes rather than a single one meant, she thought, that she had a diversified portfolio.

And then everything did go wrong. The California real estate market went bust. Many properties the partnership invested in were abandoned to foreclosure; of those remaining, none has operated successfully enough to pay out cash distributions, according to Miller's records. Her investment had become all but worthless.

It was a loss that pushed her into a depression so deep that she cried nearly every day, even on breaks at work. From then on, she vowed, no more surprises. She would have to understand everything she invested in, and it would have to be rock solid.

In not understanding what she was investing in, Miller made, to be sure, a serious mistake. Real estate limited partnerships--not to be confused with government-regulated real estate investment trusts--are, for several reasons, one of the riskiest places a small investor can put money. But she compounded her error by not having a truly diversified portfolio.

The greater the concentration, the greater the risk and the greater your potential for losses should something untoward happen.

Miller, who has a son, 29, earns about $35,000 a year from her job. She now has her savings in three safe but low-returning vehicles: about $70,000 in bank certificates of deposit; about $77,000 in a guaranteed-return annuity in her 403(b) tax-deferred retirement savings plan; and $20,000 in an IRA savings account with her teachers credit union. None of these is bringing her a great return.

Fortunately, Miller owns a three-bedroom house in Hermosa Beach that she is only a few years away from paying off--she owes just $30,000 on it. She estimates the property is worth about $350,000.

Since the real estate partnerships fiasco, things have been tight. Miller hasn't been able to save much, although she's been trying to cut her expenses by taking in renters. She did manage to put aside $3,000 for a trip to spend this past Christmas with a friend in Bethlehem, and a like amount for her son's wedding next month.

It seemed to her, she told fee-only financial planner Preston Caves in Manhattan Beach, that she was facing a real dilemma: At her age, she wouldn't have time to recover from another big loss in either stocks or real estate, but if she didn't start getting better returns from her savings, she'd be forced from her house at some point. She was feeling desperate. What to do?

Miller had been estimating that she would need $2,000 a month in retirement, including mortgage payments for the first several years, to maintain an acceptable standard of living.

She is counting on a lifetime pension of about $1,000 a month from the State Teachers Retirement System, or STRS, a program similar to Social Security that is run under state jurisdiction for certain categories of professionals, including teachers. But Miller, because more than half her working life was spent in the public sector, won't be able to count on any Social Security.